Fed Minutes Point Towards a Rate Hike

Minutes of the US central bank's last policy meeting released this week showed that robust growth in the US economy has increased the confidence of Federal Reserve officials and that the country is ready for higher interest rates.

Fed officials have upgraded their economic outlooks since the beginning of the year. They have listed three main reasons for the rise in interest rates which are the strength of recent economic data, accommodative financial conditions and the expected impact of the US$ 1.5 trillion tax cut that took effect in January.

Many expect that a tightening labour market and increased government spending would further boost inflation and will force the Fed to be more aggressive in raising interest rates this year. This, in turn, would slow down the economic growth.

The Fed has forecast three rate hikes this year. The first increase is expected at its next policy meeting in March.

In its latest meeting, the Fed said it expects "further gradual" rate increases. The target range for the federal funds rate currently is 1.25% to 1.50%.

However, St Louis Fed President James Bullard reportedly said that central bankers need to be careful to not increase rates too quickly this year as it could slow the world's largest economy.

Note that with the US economy chugging along for many months, the Fed is now gradually easing off the stimulus it provides to the economy by raising interest rates to more normal levels.

While this might provide a good buying opportunity in long-term stocks, the main thing to look forward to would be capex and earnings trends.

In the end, Indian investors are better off staying informed about the corporate earnings revival than Fed rate hikes.

Global indices ended the week on a mixed note. European stocks traded on a flattish note. Germany (DAX) and the London market (FTSE) ended their weekly session flat while France (CAC) ended the week half a percent up. Asian markets ended the week on a mixed note. The Nikkei Index ended the week marginally down, the Hang Seng Index was up 1.27%, and the Shanghai Index was up 1.63%. US markets traded in the green and ended their session with a gains of 1.42%.

Indian Stock Markets Traded on Volatile Note

Back home, the Indian indices ended their weekly session on a positive note. The BSE Sensex was up 0.39% for the week, while the NSE Nifty was up 0.37%.

IT (+3.35%), Telecom (+1.38%), and Metal (+1.35%) were the biggest gainers for the week. Auto (-1.80%), Realty (-1.18%), and Oil & Gas (-1.06%) were the biggest losers for the week.

In the news related to the Punjab National Bank (PNB) fraud case, the Central Bureau of Investigation (CBI) has filed a First Information Report (FIR) against the Mehul Choksi-run Gitanjali Group. The FIR is based on a fresh complaint made by Punjab National Bank (PNB) on February 13th.

This marks as the second FIR filed in the alleged fraud involving overseas payments to jeweler Nirav Modi, his uncle Choksi and entities belonging to them based on guarantees issued by PNB.

As for the Nirav Modi case, the Reserve Bank of India (RBI) said it has not asked PNB to pay counter-party banks against the letter of undertakings (LoUs). The central banks stated that it has begun its assessment and will take action when necessary.

The PNB case involves bank employees issuing unauthorized LoUs to three companies and four people, including Nirav Modi and Mehul Choksi.

The Central Bureau of Investigation (CBI) said ten more officials of PNB, including the bank's executive directors, were being interrogated.

Meanwhile, the CBI arrested Vipul Ambani, the president (finance) of Nirav Modi's Fire Star Diamond along with executive assistant Kavita Mankikar and Senior Executive Arjun Patil in connection with the first FIR registered by the agency.

The fraud is essentially that Nirav Modi did not pay the security deposit needed to raise an LoU. These LOUs were used to obtain short-term credit from overseas branches of other Indian banks.

The detailed investigation found that Nirav Modi had not been putting in enough of security deposit since 2011; the value of LoUs without these deposits is now around Rs 114 billion.

The above scam has put the public-sector banks (PSB's) in the limelight for all the wrong reasons. PNB has been defrauded to the tune of US$ 1.77 billion. That's the last thing these banks needed after the crisis they've had in the past few years.

This has reflected in their stock's performance too. PNB plunged more than 30% in last two weeks.

While their bad loans struggle has been going on since a decade, there are other issues that have recently cropped up adding to their pile of misery. Bureaucracy and a lack of autonomy have ensured the sub-optimal profitability and asset quality of the state-run banks.

In news from the economy, with an aim to provide fillip to exports and make global trade the foundation of Indian economy, the commerce minister Suresh Prabhu has said that the government will soon come out with a comprehensive strategy to increase the share of exports to 40% of the gross domestic product (GDP) and is expected to touch US$ 5 trillion by 2025.

According to the Federation of Indian Export Organisation (FIEO), the current share of exports in GDP is only 18-19%. Elaborating further, Prabhu said that out of the US$5 trillion, as much as US$3 trillion will come from the services sector, while US$1 trillion each will come from the manufacturing and agriculture sectors.

He added that the more than doubling of shipments will demand that the economy massively increases the share of manufacturing in the overall GDP basket, which is around 14%. He also urged the business community to come up with a proper business plan to increase exports.

At present, the size of India's GDP is US$2.6 trillion, which is the fifth largest in the world after the US, China, Japan, Germany and Britain, while its share in global trade is paltry and is under 2% only.

In other news, as per an article in the Economic Times, US-based index provider MSCI Inc. has said that the joint decision by Indian exchanges to stop providing licenses and data to foreign bourses is anti-competitive.

The MSCI warned that this could impact India's weightage in their indices, which are used by overseas asset managers to construct exchange-traded funds (ETFs) and benchmark portfolios.

Also, experts are of the view that a reduction in India's weightage in the MSCI index could potentially lead to outflows due to exits by passive funds such as ETFs.

Nifty 50 Index Ends February Expiry 6% Down

The Nifty 50 Index ends its June expiry this week. Let's have a look how the index performed during the expiry.

It was the worst expiry for the Indian indices in the last one year. Except for the first day of the expiry where the Nifty 50 Index achieved an all-time high of 11,171, the bulls did not stand a chance. The index started its free fall from day 2 and, subsequently, tumbled down 6.2% from the previous expiry.

Last expiry, we mentioned that the RSI indicator was trading in its extreme overbought territory. This indicated that a correction was expected. As a results, the index corrected 6% from the previous expiry.

Recently, the index bounced from the rising trendline (blue line) and today it went up nearly 110 points. The RSI indicator has cooled-off; and it has now reversed up from its support level. So does this indicate a resumption of the uptrend?

The derivative and rollover data can give us some clue about this. Read our detailed analysis on the derivatives data in yesterday's Profit Hunter Pro newsletter (subscription required).

COMMODITIES

Gold Trades on a Negative Note

Gold traded on a negative note during the week. After opening gap down on Monday, the yellow metal gradually traded down throughout the week. The selling was seen due to fall in demand from local jewelers and retailers amid a weak trend overseas. The yellow recovered a bit towards the end of the week, but resumed its down move on the final day to end its weekly session with 1% loss.

Gold Ends in the Red

Crude Oil Witnesses Buying Interest

Crude oil traded on a positive note during the week. It opened its session higher on Monday and continued to trade up to end the session positive. The commodity witnessed some profit booking during the mid-week before resuming its up move. Finally, on Friday, the black gold witnessed solid buying interest on back of drop in US inventories. It ended its weekly session 4.64% up.

Crude Oil Soared 5% for the Week

CURRENCIES

Dollar Hits 3-Month High

The dollar traded on a positive note during the week. It opened its weekly session higher and continued to trade in an uptrend throughout the week. The currency stood tall after the Fed minutes pointed towards more US rate increase this year. The dollar also rose because of demand from the importers amid heavy foreign fund outflows. Finally, on Friday, the currency witnessed some profit booking and ended the weekly session 0.72% up.

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The Indian stock markets ended its April futures and options (F&O) expiry 5% up. Read More...

| 27 Apr 2018

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